Instacart Is Expanding to Canada in Amazon Battle

Grocery-delivery startup Instacart Inc. has refrained from rushing expansion beyond the U.S., unlike many other startups valued at more than $1 billion. But Amazon.com Inc.'s surprising acquisition of Whole Foods has changed those plans.

Instacart is close to a deal to partner with Canada's largest grocer, Loblaw Cos., to launch its service there in the coming months, the startup's first international foray amid increasing competition, according to people familiar with the matter.

The deal will allow Instacart to begin delivering groceries from Loblaw stores in Toronto and then expand nationally throughout the grocer chain over the next year, one of the people said. Instacart already has delivery deals with well-known U.S. retail chains, including Whole Foods, Costco Wholesale Corp. and Target Corp., where the startup relies on contract employees to pick and bag groceries and then deliver them to customers' doorsteps.

Instacart, which operates in 38 U.S. states, had considered expanding into Canada for the past three years. Then Amazon's Whole Foods deal in June jolted the food retail industry and accelerated Instacart's talks with three national grocers, including Loblaw, according to another person familiar with the matter.

It isn't clear what impact the Amazon acquisition will ultimately have on Instacart's Whole Foods partnership. Whole Foods is also an investor in Instacart -- meaning the startup is an unlikely bedfellow with Amazon.

Instacart will face strong competition in Canada. The Wall Street Journal reported last month that Amazon plans to roll out its one- and two-hour Prime Now membership delivery service into Canada later this year. Earlier this month, Metro Inc. announced it would focus on online grocery delivery in Quebec, where it will fulfill orders using dedicated teams at 10 stores across the Canadian province.

Toronto-based Loblaw, Canada's biggest grocer by revenue, has taken a relatively cautious approach to its e-commerce plans compared with its competitors. The company currently offers a grocery pickup service at more than 100 stores across the country, and Chief Executive Galen Weston told analysts in February that Loblaw may experiment with home delivery in the future. The company has more than 2,400 locations ranging from discount and supermarket groceries to pharmacies, and booked 46.4 billion Canadian dollars (US$37.19 billion) in revenue during its most recent fiscal year.

Canada's online grocery industry remains relatively small compared with other countries, though e-commerce analysis firm Profitero Inc. estimates that the country's online market will be worth about 3% of C$120 billion sales by next year. Online grocery shopping accounts for less than 5% of the nearly $800 billion in food and beverage sales in the U.S.

Instacart's entry into Canada is expected to weigh on other grocers such as Empire Co. as well as the domestic arms of stores such as Wal-Mart Stores Inc. and Costco Wholesale Corp., which all have explored shipping online grocery orders to Canadian doorsteps.

"With all the leading retailers expanding their e-commerce offers, fees could become an important differentiator as they start to overlap with each other," said Stewart Samuel, program director at IGD Canada.

Unlike Amazon and smaller services such as Fresh Direct LLC, Instacart doesn't store food in its own warehouses. Instead, it saves costs by relying on existing grocers' inventory and infrastructure.

Instacart hires independent contractors as couriers to pick up goods at existing grocery stores and has drivers use their own cars to drop off the groceries at customers' homes. It makes money by charging for delivery, marking up some items to pocket the difference and collecting fees from some brands for promotions.

Instacart raised around $400 million in March in a new funding round that valued the company around $3.4 billion. The company has raised $675 million since 2012, according to Dow Jones VentureSource, from venture-capital firms including Sequoia Capital and Andreessen Horowitz.

Write to David George-Cosh at david.george-cosh@wsj.com and Greg Bensinger at greg.bensinger@wsj.com